If the definition of insanity is doing the same thing over and over again and expecting different results, then Americans are starting to look a little batty: The average American's consumer debt is climbing back to the highest levels since we exited the Great Recession. At the same time, however, mortgage payments are declining thanks to the current low home prices. So should we be worried about the uptrend in consumer debt?
Debt on the rise
According to the Federal Reserve, Americans' appetite for loans is increasing again. The amount of revolving credit outstanding, which primarily reflects credit card debt, totaled $882.1 billion in November, up from $853.3 a year prior. The amount of student loan debt outstanding has climbed from $1.21 trillion to $1.3 trillion; auto debt outstanding has grown from $866.4 billion to $943.8 billion; and mortgage debt outstanding increased $35 billion between the second and third quarter to $8.13 trillion. As of the third quarter, the Federal Reserve Bank of New York pegs Americans' total debt at $11.71 trillion.
Those numbers may look great to banks like Wells Fargo (NYSE:WFC), which rely on rising loan volume to pad earnings, but they should be worrisome to American consumers, because they suggest millions of people are spending more money paying down debt and less money saving for a rainy day or retirement.
Straining balance sheets
In the past year, the amount of revolving debt taken on by consumers has grown by 3.3% -- nearly double the rate of growth in the average American's income. As a result, the percentage of the average American's disposable income that goes toward paying monthly consumer debt payments -- such as credit cards, student loans, and auto loans (but not mortgages) -- has increased for seven consecutive quarters to 5.3%.
Although the percentage of disposable income that goes toward consumer debt payments still remains below its prior peaks, the current trend could be worrisome, especially if it ends up mirroring the trend that followed the savings and loan crisis in the early 1990s.
Is this a big deal?
Although Americans are paying a greater share of their disposable income to finance consumer debt than they were a year ago, there's little evidence to suggest that consumers are anywhere near a tipping point that could cause budgets to buckle, spending to sag, and the U.S. economy to slide. In fact, the bigger picture of household debt is much less worrisome than those consumer debt figures.
The financial obligations ratio -- a broad measure that, unlike the debt-service-to-obligations ratio, includes rent payments, home owner's insurance, and property tax payments -- is at its lowest levels since the early 1980s. And the total debt-service ratio, which includes consumer debt and mortgages, stands close to 35-year lows at 9.9%. Thus these more comprehensive measures paint a much prettier picture of the average American's financial situation than the consumer debt payment ratio alone.
Everything is OK -- for now
With lower mortgage payments offsetting higher payments on credit cards, student loans, and auto loans, household debt isn't likely to sink our economy -- at least not yet. However, that could change if home prices inch their way higher and mortgage interest rates start to climb. If that happens, then higher monthly mortgage payments could be cause for concern that the average American's debt has indeed become a problem again.
Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Legal beagles won't let me ask or let them tell me.
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